What is a Moving Average?
Moving averages are the most popular method of technical analysis for asset traders. Using moving averages creates a clearer picture on a trading chart by smoothing out the graphs to see trend indicators.
Historical trend watching
Although the average only takes into account past data, as a trend following indicator it is useful for seeing where the market is going.
Simple Moving Average (SMA)
As its name suggests, the SMA is the average price of an asset from a set period of time. Because it is a "moving" average, as new data enters the period, old data is discarded. For example, if the SMA is a 10 day period, the average is always calcuated from the last 10 days.
All price points in an SMA are weighted equally.
Exponential Moving Average (EMA)
To counter the belief that newer data is more relevant than older data, the EMA was created. More weight is assigned to the most recent price points. The EMA is therefore more indicative in relation to sudden price changes and volatility. Short-term traders are more likely to use EMAs to allow them to anticipate price reversals faster.
Another factor to look at when using moving averages is the size of the period. A longer period will have more data points but may show new information more slowly. Traditionally 50 and 200 days periods are commonly used, but since crypto trading is a 24/7 volatile market and as such, MAs may be more useful in smaller periods.
When two different MAs cross over in a chart, this can be a signal. If a short-term MA moves above a long-term MA, this is seen as a bullish move (a "golden cross") indicating buying activity is increasing and prices are going up. The opposite happens when a short-term MA dips below a long-term MA (a "death cross"), signalling a downward trend.
Your mileage may vary
Moving averages can be calculated not only in days, but in hours and minutes as well. Depending on your trading style, you will want to adjust for the periods that are of most interest to you.